Issue of Debentures

Debentures are the long term (sometimes medium term also) fundraising instruments. In legal terms, a debenture is nothing but a document that generates liability. It is nothing but a certificate of debt showing the fact that the company is liable to pay a certain amount with interest. The debenture holder can independently transfer the debentures. Unlike the shareholders, debenture holders don’t have any voting right in the company. In this article, we will discuss the debenture issue.

Debenture Issue

There are certain steps for the complete purchase of debentures by a person in his own name. It involves the investors applying for security (debenture) according to the prospectus of the company.

Sometimes, the company asks for the entire amount with the application only but generally, the company does it on an installment basis. There are 3 means to issue them which are as follows :

1. Issuing Debentures at par
2. At premium
3. Issuing Debentures at a discount

Browse more Topics under Introduction To Company Accounts

• Basic Concepts of Company Accounts
• Issue of Shares for Cash
• Issue of Shares for Consideration
• Under and Over Subscription
• Calls-in-Advance
• Calls-in-Arrears
• Issue of Shares to Promoters
• Forfeiture of Shares
• Reissue of Shares
• Issue of Debentures as Security
• Issue of Preference Shares
• Capital Redemption Reserve Account

At Par

When the payment received and the nominal value of the debentures are similar or equal then it is the case of ‘Issue of Debentures at Par’. In other words, it is when the issue price is similar to the face value of the debenture. E.g., Issuing Debentures of Rs.1,000 for Rs.1,000.

There are different journal entries in connection with issuing debentures.

1. On receipt of Application Money

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Bank A/c                                                                 Dr.		XXX
	To Debentures Application A/c                    Cr.			XXX
	(Being receipt of the application money on debentures @Rs. per debenture)

2. On allotment, transfer to Debentures A/c

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Debentures Application A/c                            Dr.		XXX
	To Debentures A/c                                        Cr.			XXX
	(Transfer of application money on debentures adjusted to the debentures account.)

3. Amount Due on Allotment

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Debentures Allotment A/c                               Dr.		XXX
	To Debentures A/c                                        Cr.			XXX
	(Being the allotment money due on debentures)

4. Receipt of debenture allotment money

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Bank A/c                                                              Dr.		XXX
	To Debentures Allotment A/c                         Cr.			XXX
	(Being the receipt of debenture allotment money)

5. Amount Due On First Call

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Debentures First Call A/c                              Dr.		XXX
	To Debentures A/c                                    Cr.			XXX
	(Being the due of the first call money on ___ debentures @___)

6. Receipt of Debentures First call money

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Bank A/c                                                           Dr.		XXX
	To Debentures First Call A/c                   Cr.			XXX
	(Being the receipt of debentures 1st call amount)

At Premium

When a company issues security at a price higher than the nominal value, it is called the ‘Issue of Securities at Premium’. Hence, the extra issue price over the face price is the amount of Securities Premium Reserve.

Journal Entry in Case of Issuing Debentures at Premium:

Amount Due on Allotment (Along with Premium)

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Debentures Allotment A/c                               Dr.		XXX
	To Debentures A/c                                       Cr.			XXX
	To Security Premium Reserve A/c           Cr.			XXX
	(Being the allotment money along with premium due on debentures)

Solved Question on Issue of Debentures

Question: What do you mean by issuing ‘Debentures at Discount’?

Answer: When a company issues the debenture at a price less than its nominal value, it is a case of debenture issued at discount.

Example

Verma Ltd. issues 10,000, 9.5% Debentures of Rs.100 each, at Rs.90, redeemable at par after 2 years, payable Rs.60 on the application and the balance on the allotment. The debentures are fully subscribed and all the money is duly received. Prepare Journal.

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
1.	Bank A/c (10000 X 70)                                Dr.		6,00,000
	To Debenture Application A/c			6,00,000
2.	Debenture Application A/c                          Dr.		6,00,000
	To 10% Debentures A/c			6,00,000
3.	Debenture Allotment A/c                             Dr.		3,00,000
	Discount on Issue of Debentures A/c        Dr.		1,00,000
	To 10% Debentures A/c			4,00,000
4.	Bank A/c                                                          Dr.		3,00,000
	To Debentures Allotment A/c			3,00,000